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Rajaratnam Seeks Reversal Day After Gupta Sentenced

Raj Rajaratnam, the Galleon Group LLC co-founder accused of insider trading, left, arrives with his attorney, John Dowd, at federal court in New York, U.S., on Tuesday, May 10, 2011. Photographer: Peter Foley/Bloomberg

Oct. 25 (Bloomberg) -- Galleon Group LLC co-founder Raj
Rajaratnam is asking a federal appeals court to set aside his
conviction for directing the biggest hedge fund insider trading
scheme in U.S. history one day after a key source of his tips
was sentenced to two years in prison.

Former Goldman Sachs Group Inc. director Rajat Gupta, a
friend and business partner of Rajaratnam who ran McKinsey & Co.,
appeared yesterday before U.S. District Judge Jed Rakoff in
Manhattan seeking leniency for his role in the conspiracy. While
Gupta, 63, is the most prominent of 70 people convicted in a
four-year U.S. insider-trading crackdown, Rajaratnam, 55, was
the mastermind of the hedge-fund scheme that was his downfall.

The case against Rajaratnam, convicted last year of
conspiracy and securities fraud, turned on the first significant
use of government wiretaps in an insider-trading case. Those
wiretaps are now at the center of his appeal. His lawyers argue
the U.S., required to exhaust other avenues of inquiry before
resorting to electronic surveillance, hid the existence of a
related Securities and Exchange Commission investigation from a
federal judge when seeking permission for a wiretap.

Rajaratnam’s lawyers, some of whom were present at Gupta’s
sentencing, claimed the government made a “long pattern of
falsities, misleading misrepresentations and material
omissions” to U.S. Circuit Judge Gerard Lynch, who was a
district court judge in 2008 when he signed the warrant
authorizing a wiretap of Rajaratnam’s mobile phone. They warned
the appeals court that the conviction, if upheld, may lead to
lower standards for warrants, and thus an increase in
wiretapping by federal investigators.

“Imagine what the next wiretap application will look
like,” his lawyers wrote the panel of three judges who are
hearing arguments today in New York.

FBI Wiretaps

Based on the initial warrant and later renewals, the
Federal Bureau of Investigation recorded more than 2,200 calls
between Rajaratnam and 130 business associates, friends and
family over nine months.

During Rajaratnam’s trial, the government introduced 45
wiretap recordings along with documents and testimony derived
from the wiretaps, according to filings with the U.S. Court of
Appeals in New York. That evidence must be thrown out and his
conviction overturned, his lawyers argued.

Rajaratnam is also challenging jury instructions given by
U.S. District Judge Richard Holwell, who presided over the trial.
Holwell told jurors they could convict the hedge fund manager of
securities fraud if they found that his use of illegal tips
“was a factor, however small,” in his decision to buy or sell
stock.

Previous Rulings

Defense lawyers argued that the appellate court should
reconsider its own previous rulings allowing similar jury
instructions. Instead, the court should require prosecutors to
prove a stronger connection between inside information and
trading decisions, they said.

Rajaratnam was sentenced to 11 years in prison, one of the
longest sentences ever imposed for insider trading, and is
serving his term at the Federal Medical Center Devens in Ayers,
Massachusetts.

He engaged in a seven-year conspiracy to trade on inside
information from various sources, including Gupta, corporate
executives, bankers, consultants and traders, and gained $63.8
million as a result, according to the government.

Much of the evidence at trial was based on the wiretaps.

Prior to the trial, Holwell held a hearing on whether the
surveillance transcripts should be suppressed. He declined,
finding that, while prosecutors were “reckless” in omitting
the scope of the earlier SEC investigation, the omissions
weren’t enough to throw out the warrant.

Properly Denied

Prosecutors have argued that Holwell properly denied
Rajaratnam’s bid to suppress the wiretaps, though they contend
the judge erred in holding that the government made “reckless”
omissions, asserting that he applied the wrong legal standard.

From March through November of 2008, the FBI in New York
had intercepted numerous conversations on Rajaratnam’s mobile
telephone. To obtain those wiretaps, federal authorities
obtained the authorization of six federal judges, the U.S. said.

Each judge who signed wiretap authorizations found there
was probable cause to believe Rajaratnam and others were
committing crimes such as wire fraud in connection with an
insider-trading scheme, prosecutors said. The interceptions were
necessary because normal investigative techniques “had been
tried and failed or were not likely to succeed,” according to
the government.

Pre-Trial Hearing

Rajaratnam’s lawyers unsuccessfully argued before trial
that the wiretaps should have been excluded, saying the
recordings can’t be used in criminal insider-trading cases.

“Congress did not, as Rajaratnam argues, restrict the use
of wiretapping to exclude insider trading,” prosecutors
countered in court papers.

The defense claimed the U.S. misled Lynch, making omissions
and false statements about the background of Roomy Khan, a
former Intel Corp. executive whose disclosures prompted the
probe and served as a basis for the wiretap request. They also
argued that prosecutors failed to disclose the SEC had obtained
millions of pages of documents as part of its investigation.

Gupta’s Downfall

Prosecutors said Gupta, convicted in June of securities
fraud and conspiracy, deserved as long as 10 years in prison,
one fewer than his friend Rajaratnam received. Gupta sought
probation and community service, and his lawyer proposed that he
work with the poor in Rwanda.

The sentencing marked the nadir of his career, for a man
who rose to the top of corporate America after being orphaned as
an 18-year-old in Kolkata. He served on the boards of Procter &
Gamble Co. and AMR Corp., and as McKinsey’s youngest managing
director, almost tripled that firm’s revenue.

The evidence that Gupta passed illegal information about
Goldman Sachs to Rajaratnam was “not only overwhelming, it was
disgusting in its implications,” Rakoff said before handing
down the sentence.

Gupta was convicted by a jury of leaking tips to Rajaratnam
about the New York-based bank, including information on a $5
billion investment by Warren Buffett’s Berkshire Hathaway Inc.
on Sept. 23, 2008, and a tip on a quarterly loss.

The jury acquitted Gupta of charges that he leaked
information that Cincinnati-based P&G’s organic sales growth
would fall below estimates and that he tipped Rajaratnam about
Goldman Sachs’s earnings in the first quarter of 2007.

Circumstantial Evidence

Unlike Rajaratnam’s prosecution, which was based on dozens
of wiretaps of his mobile-phone conversations, the case against
Gupta was largely circumstantial and built on trading and phone
records, business relationships and comments by Rajaratnam or
others about Galleon’s sources of information. The jury heard
one wiretapped conversation between Gupta and Rajaratnam.

At Gupta’s trial, Goldman Sachs Chief Executive Officer
Lloyd Blankfein told jurors that he briefed his board over the
phone on the Buffett investment beginning at 3:15 p.m. Within a
minute after the call with the directors concluded at 3:53 p.m.,
Rajaratnam answered a call on his private line from a McKinsey
conference room being used by Gupta, according to phone records
and testimony.

“I got a call at 3:58, right?” Rajaratnam said on a
wiretapped conversation with another trader that was played at
the trial. “Saying something good might happen to Goldman.”

The Rajaratnam appeal is U.S. v. Rajaratnam, 11-04416, U.S.
Court of Appeals for the Second Circuit (New York); The Gupta
case is U.S. v. Gupta, 11-00907, U.S. District Court, Southern
District of New York (Manhattan).